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How unemployment affects the economy

Unemployment is a serious issue in several nations of the World. It can cause several problems such as poverty, crime, political instability, communal disharmony, and psychiatric problems. Besides, unemployment has a major impact on the country’s (or the region’s) economy. High unemployment rate not only affects the financial status of the individual who does not have a proper job, but the entire nations, even those who have a good job. An unemployed individual has received training and orientation in a particular field. If his/her skills are not being utilized, then the growth and development of the nation is at stake.

Some nations are providing the unemployed with special funds, welfare schemes, residential facilities, transport services and other useful measures. A huge budget is required to maintain such schemes. If this budget is diverted in developmental programs in other areas, the nation would immensely benefit. Unemployment can increase the economic gap between the rich and the poor of a country. There is an increase in social inequality following unemployment. Some social scientists feel that in many nations a class that does not have employment for a long-period is developing.

This class would also include those who do not have a secure long-term job or those appointed on contractual basis. Such individuals may in fact take up short-term works, and be paid less. A country with high unemployment rates could be considered as ‘production units’ having a greater capability. If the unemployed were utilized, then the production would be greater, allowing for better growth and development. In the race against time, the manpower hours lost due to unemployed is great and may not be recoverable. The employed individuals are not able to contribute toe the nation’s GDP (Gross Domestic Product).

Hence, the nation’s GDP (a value that demonstrates the size of a nation’s economy or the nation’s output). If a nation is able to reduce the unemployment rates, the national production output will increase and it can contribute hugely to the nation’s economy. Unemployment may reduce the Governments earning collected through tax and other duties. As the unemployed are not able to earn, they need not pay tax. Hence, the Government may have less money to spend in other areas in which developmental programs are essential.

As it spends more (through expenditure) and earns less (through taxes and revenues), the government borrowing requirements, which is known as ‘public sector net cash requirement’ may be increased. It may have to borrow money from other countries in order to support the unemployed. Often during training people, certain precious resources (including financial, human, materialistic, infrastructure and time resources) are being utilized. They seem to get wasted, once a trend in unemployed begins. Besides, unemployed people may lose their skills, if they do not get an appropriate job.

In the future, due to their lack of experience, they may find it even more difficult to get a proper employment. Unemployment may also have certain social implications which contribute to the nation’s economy. Studies have shown that following increased rates of unemployment, there is a rise in crime rates and deterioration of social security. This may be due to the fact that the unemployed may not be able to maintain a reasonable social and economic status, compared to those employed. Besides, crime and security issues, the unemployed may not have a good mental and general health status.

This could contribute in increased expenditure in the field of public health, and maintaining law and order. Usually individuals seek health insurance after getting a good job. Unemployment may often decrease the health status and increase medical costs. Family and marital problems are also common in the unemployed. It is also found that unemployment is associated with higher suicide rates in the community. Surveys conducted in areas in which the society enjoys a good employment rates showed that the gap between the rich and the poor (income inequality) slowly reduced.

Higher unemployed rates may result in young individuals taking longer time to get good jobs. As people get older, their ability to perform work may be reduced. Companies that want to expand and invest in new areas may not consider such regions. Studies conducted in 1972, have shown that about one in every six individuals who were unemployed were below the poverty line. The proportion of poverty rates in the unemployed was higher than the national poverty rates. In the 1970, most of the unemployed were able to get jobs fast and earn an income.

Thus poverty situation was short-term during that period. In 1996, about 3 in every 4 who were unemployed belonged to the poverty groups. As poverty increases with longer periods of unemployment, such individuals are taking longer to find proper employment. Higher rates of unemployment would mean that employers can get labor at a lower cost. However, this kind of labor would not promote proper growth and development. Some people due to prolonged period of unemployment along with financial instabilities and social problems may join jobs that are not appropriate for their skills.

These individuals may find it difficult (or take longer) to adapt to their new jobs, as their role in the company does not fit their talents. This is also a type of unemployment situation (known as ‘underemployment’). Often nation’s valuable human resources are lot through such kind of employment. The process of unemployment can often become cyclic. A nation would be producing less good that it actually produces. Customers would be spending less on the products. Hence, the manufactures would not be able to grow and expand, and contribute to a decrease in the unemployment rates. Unemployment may also have a certain benefits.

It keeps the inflation of the economy under a check. Observations conducted on the economy have shown that as the unemployment rates reduced, there was a higher inflation rates (Phillips curve). The Government of such economies may often find it difficult to keep a tab on the prices. Some nations may also try to maintain a natural rate of unemployment in order to keep a control over the inflation rate. A natural rate of unemployment is a condition in which (aside from frictional unemployment and structural unemployment) a full rate of employment exists in the economy, and is usually about 6% unemployment.

Structural unemployment is a situation in which the worker no longer possesses the skills required for a particular job. Often modern technology is more effectively able to replace the skills of such employees. Frictional unemployment is a process in which the individual may not be satisfied with one job and is in a constant process of searching for new jobs. This process would allow the employees to find people that really suit the job. Often higher unemployment rates create fears in the minds of the employees. They may begin to perform better and work harder. The employees are also constantly in touch with their skills.

The productivity also increases, and so does the economic growth. Labor unions are also not so powerful in economies where unemployment is higher. These are enormously beneficial to the employers. Unemployment is a kind of resource constraints that controls the economic growth. It is very difficult to maintain a good GDP perpetually. A natural rate of unemployment may help to control the GDP. However, higher rates of unemployment would result in a serious economic slowdown.


Economics Teachers’ Society. “Income Inequality -26. ” The Labor Force, Index. 2006. Economics Teachers’ Society of South Australia. 30 Nov. 2006

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